IASB and FASB Report Progress on Convergence

FASB
and the International Accounting Standards Board (IASB) on Thursday
published a progress report
on their joint convergence projects.

Since
their previous report in November, the boards have:

Completed
five projects. In the next few weeks, the IASB will issue new
standards on consolidated financial statements (including
disclosure of interests in other entities), joint arrangements
and post-employment benefits. Both boards also will issue new
requirements in relation to fair value measurement and the
presentation of other comprehensive income.

Provided
for further time to finalize their convergence work. The boards
have agreed to extend the timetable for the remaining priority
convergence projects beyond June to permit further work and
consultation with stakeholders. The convergence projects are
targeted for completion in the second half of this year.
However, the U.S. insurance standard, which has not yet been
exposed for comment, is targeted for the first half of 2012.

The
progress report highlights several developments relating to pending projects:

Financial instruments: After reviewing the feedback
received, FASB has tentatively decided to consider three categories
for financial assets: (a) fair value measurement with all changes in
fair value recognized in net income (trading or holding for sale);
(b) fair value measurement with changes in fair value recognized in
other comprehensive income (investing with a focus on managing risk
exposures or maximizing total return); and (c) amortized cost,
subject to an improved impairment approach (customer financing with
ability to manage credit risk by renegotiating cash flows with
customers) and enhanced disclosures.

When
FASB has made its decisions about classification and measurement,
which it expects to do in the third quarter of 2011, the IASB will
seek views from its constituents about FASB’s conclusions.

A
supplement released by the standard setters in January presented an
impairment model that reflected the differing objectives for
impairment accounting while proposing a common solution to
impairment. It outlined a model in which the amount and timing of
recognition would vary according to the credit characteristics of
the financial asset, specifically the degree of uncertainty about
the collectibility of cash flows.

In
April the boards considered the feedback from comment letters and
the boards’ outreach activities. There was no clear consensus among
respondents. The boards are working through the issues and
suggestions and are determined to reach a consensus on a basic
approach by the end of June. Once the boards have reached consensus
they will need to assess what additional steps, such as potential
re-exposure or outreach, are necessary to allow the new requirements
to be finalized.

Leasing: The boards published a joint exposure
draft in August 2010. The proposals would bring lease obligations
and the related assets onto the balance sheets of lessees. The
proposals for lessors were designed to ensure that an entity that
retains significant risks or benefits of the leased asset would
recognize that asset and an associated obligation to allow the
lessee to use the asset. In other cases, when the significant risks
or benefits of the leased asset are transferred to the lessee, the
lessor would derecognize the portion of the asset that is
transferred by the lease agreement.

The
boards have been considering the feedback received from comment
letters and outreach activities and are close to completing their
deliberations. In light of that feedback, the boards have made
tentative decisions that mean that the standard they are working
toward will reflect changes from the ED.

Once
the boards have completed those redeliberations, they will consider
whether re-exposure of the proposal is needed. If the boards
conclude that re-exposure is not necessary, they intend to develop a
draft of the new standard, which will be posted on the boards’
websites, used as the basis for outreach with parties that are most
affected by the proposed new requirements; and “subjected to a
detailed drafting review with selected parties, as part of the fatal
flaw review process each board is required to undertake.”

Revenue recognition: The IASB and FASB published a
joint discussion paper in December 2008 that proposed a single
revenue recognition model built on the principle that an entity
should recognize revenue when it satisfies its performance
obligations in a contract by transferring control of goods or
services to a customer.

U.S.
GAAP includes a wide range of detailed, industry-specific
requirements regarding revenue recognition. IFRS has general
requirements that cause preparers to rely on U.S. GAAP for specific
guidance. This project is intended to reduce FASB’s detailed
guidance to consistent principles and to remove the need for IFRS
users to refer to GAAP.

The
boards have been considering the feedback received from comment
letters and outreach activities and are close to completing their
re-deliberations on revenue recognition.

Similar
to the leasing project, once the boards have completed their
redeliberations, they will consider whether re-exposure is needed.
If they opt to go directly to developing a draft of the new
standard, it will be posted on the boards’ websites, used as the
basis for outreach with affected parties and “subjected to a
detailed drafting review with selected parties, as part of the fatal
flaw review process each board is required to undertake.”

Insurance: The boards are aiming to complete their
deliberations on major issues by the end of June, but are unlikely
to complete all discussions until the second half of 2011. Once the
boards have completed their deliberations, they will prepare their
next due-process documents. For FASB, this will be an ED and, for
the IASB, this will be a final IFRS. Before an insurance contracts
standard is finalized, the boards will follow the same procedures
described for the revenue recognition and leases projects, including
assessing whether the proposals should be re-exposed and making a
draft widely available as the basis for performing additional outreach.

The
IASB is working to issue a new standard on insurance accounting by
the end of 2011. FASB will consider the feedback received on its ED
with a view to finalizing a standard in 2012. The boards then will
consider any differences that may have arisen and how best to
address them.

“The
progress report highlights the many areas where we have already
improved and converged our standards, and our plans for completion
of the priority projects,” FASB Chairman Leslie Seidman said in a
press release. “We have also clarified our plan to continue to
engage stakeholders in the remaining steps of the process, and give
them an opportunity to review the draft standards before they are finalized.”

The
convergence program continues to raise the standard of financial
reporting worldwide, “delivering much-needed improvements in key
areas and providing a solid platform for global high-quality
standards,” IASB Chairman Sir David Tweedie said in a press release.

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